JMRD Market Observer for April 21st, 2017 – Canadian Banks – Ontario’s housing plan does not materially alter our outlook for bank stocks

April 21, 2017

In This Week’s JMRD Market Observer

 

 

  • Canadian Banks – Ontario’s housing plan does not materially alter our outlook for bank stocks

  • A Closer Look at Public REIT Exposure to the GTA as Ontario Government Tampers with Real Estate Markets

  • JMRD Basket Corner

  • Retirement Corner

  • Reads of the week

  • Economic Calendar

  • Earnings Reports

 

 

Canadian Banks – Ontario’s housing plan does not materially alter our outlook for bank stocks

 

The Ontario Government laid out a 16-point Fair Housing Plan aimed at cooling a hot housing market in the Greater Toronto Area (GTA) and improving housing affordability/accessibility. Key parts of the plan include the introduction of a 15% Speculative Tax on Non-Residents (aka, a foreign buyer’s tax), a vacant home tax in Toronto, rent controls across the Province and other tax reforms (e.g., vacant land tax to encourage development). Of these, the foreign buyer’s tax could have the most impact in the near term, at least in terms of reducing transaction volumes and cooling rapid price appreciation, which is what we’ve witnessed as a result of similar actions taken in Vancouver to cool that market (though other factors were at play).

 

Could curb mortgage growth for the Big-6 (which could be viewed as a positive). The first potential outcome that springs to mind from these regulatory announcements is that they could curb mortgage growth for the banks. For perspective, TD, BNS and CM have the most proportional exposure to Ontario mortgages, at ~50% of their total domestic mortgages/HELOCs, while NA, CM and BMO have been experiencing the fastest mortgage growth in the province over the past year. While the market typically appreciates growth, in this case we believe an exception will be made, as investors have become more concerned about the risks associated with “excessive” mortgage growth (e.g., fallout if the housing bubble bursts). For example, CM’s above-market mortgage growth rates has been met with investor skepticism, not praise, over the past year. Moreover, since mortgages are such a low-margin product, a modest reduction in origination volumes does not materially impact our earnings growth outlook for the sector.

 

Our primary concerns related to housing regulation are of unintended consequences. Government regulation can be a good thing, but it can also make things worse. While we view the Ontario Government’s actions as benign, we must still consider potential negative outcomes. And as it relates to housing, credit performance is the most relevant risk to consider, especially in terms of indirect exposures. For instance, construction jobs represent 7% of employment in Ontario (much higher if including related industries) and the housing sector (both direct and indirect) represents ~20% of Ontario’s GDP. If regulation results in job losses and reduced economic activity in the housing sector, then the banks could have a problem. We believe it is too early to make this call and there are some offsetting factors (e.g., a tax on vacant land could spur development) to consider.

 

See the full article.

 

 

A Closer Look at Public REIT Exposure to the GTA as Ontario Government Tampers with Real Estate Markets

 

The Current Landscape

The topic of housing affordability in Toronto (and the GTA more broadly) has been front of mind for investors, sellers and the general public for several years. While many have questioned the sustainability of price increases, supply / demand dynamics are a contributing factor combined with higher demographic and economic growth figures (the city has put up almost double the GDP growth and labour force / population increases of both Ontario and Canada as a whole on a percentage basis in the last five years). In light of these trends as well as recent government policy announcements, we delve deeper into our coverage universe exposure to the GTA market. Generally we are favourable on this exposure and believe that there is an enthusiasm gap between private market investors and public REIT owners as returns and multiple expansion have been less prevalent for the latter. With regards to the Ontario government’s moves on affordability (rent control, foreign buyers tax, etc.) we expect some impact, albeit condo owners and not the REITs are the clear losers and if supply is constrained existing multi-family owners could be net beneficiaries (from an operations standpoint).

 

Who in Our Coverage Universe Is Impacted Most

In terms of larger REITs with significant GTA exposure Allied Properties, Dream Office, SmartREIT, CAP, First Capital and Pure Industrial derive more than one-third of their NOI (or GLA in cases where not provided) from this region. Generally Toronto has been the strongest area from an operating fundamentals standpoint across asset classes, although we caution that not all property types are created equal and pressures, while not as acute, in the conventional office segment have been relatively challenging.

 

See the full article.

 

 

JMRD Basket Corner

 

DIG Basket

 

Dollarama (DOL) – Canadian discount retailer Dollarama Inc reported a higher-than-expected quarterly profit on Thursday as customers spent more in its stores. The Montreal-based company said the rise in sales was aided by a 7.8 percent increase in the average checkout bill. Dollarama also said it opened 26 new stores in the fourth quarter. The retailer has revised its long-term target of 1,400 stores to 1,700 stores, over the next 8-10 years across Canada, after a review of market potential. Dollarama increased its quarterly dividend to $0.11 per share from $0.10. The shares were up 10% this week, as of the time of this writing.

 

Northland Power (NPI) – On April 1st, Germany held its first offshore wind capacity tender and released the results on April 13th. EnBW (a German utility company) won a contract to build its 900 MW He Dreiht project in the German North Sea with no subsidy. The other winner, DONG Energy (an integrated energy company from Denmark), won a contract to build three projects for a total capacity of 590 MW, with no subsidy for 480 MW and a €60/MWh subsidy for 110 MW. Prices of offshore wind contracts have continued to drop over the past year. With developers willing to build projects without subsidy, the market has officially matured. See the full article.

SNC-Lavalin (SNC) – Canadian engineering and construction company SNC-Lavalin Group Inc on Thursday said it would buy British engineering and consultancy firm WS Atkins Plc for C$3.6 billion $2.67 billion), firming up an indicative offer it made earlier this month. SNC-Lavalin’s offer of 2080 pence ($26.66) per share in cash is the same as the indicative offer Atkins disclosed on April 3. It represents a 35.1 percent premium to Atkin’s closing price on March 31. “This acquisition is fully aligned with our stated growth strategy of becoming a recognized E&C (engineering and construction) powerhouse,” Neil Bruce, chief executive of Montreal-based SNC, said on a conference call. The combination creates a global company specializing in professional services and project management with C$12.1 billion in revenues and 53,000 employees.

 

All-Cap Growth Basket

 

New Flyer Industries (NFI) – NFI reported new bus manufacturing orders totaling 708 equivalent units (EUs) for Q1/17, comprised of firm (534 EUs valued at US$267 mln) and options (174 EUs worth US$69 mln). The pace is below the 1,522 EUs booked last quarter and 1,149 TTM quarterly average, but not cause for concern, as: 1) new orders totaling 1,054 EUs have been won but not yet documented, expected to be added to backlog in coming Qs; 2) Q3/16 new order flow was lower (585 EUs), with the market not reacting negatively to the print; 3) LTM book-to-bill remained a healthy 120% (>100% for 16 of the last 17 quarters); 4) mgmt. commentary continues to be bullish regarding the North American transit and coach manufacturing industries (favorable replacement cycles, improved funding environment, focus on green technologies and operating efficiencies); and 5) this view is supported by NFI’s bid universe, with solid bids submitted (5,660 EUs, +23% q/q), record active EUs (8,084 EUs, +23% q/q) and overall remaining healthy (22,144 EUs, +5% q/q). See the full article.

 

Shopify (SHOP) – Shopify kicked off its annual partner conference today – Unite 2017. If we were to take anything away from the keynote sessions it was that everything we heard with respect to Shopify’s platform plans this year points to fortifying its moat. And while we’ve only been “live” on the name since March 1st, the news flow momentum has driven the name quickly towards our target. The question is – is this run over? In our view, no, and what we heard from the keynotes only goes to drive the investment thesis laid out in our in-depth report titled Add This To Your Shopping Cart. Candidly, there was a lot to take in with respect to the keynote presentations, and we’ll need some time to reflect on the financial impact it will have on our forecast model – what we can say, however, is that the contribution from the initiatives is likely only to increase the confidence in our financial outlook at a minimum. We’ll look to revising our target as we approach Shopify’s FQ1 results on May 2nd before the open. With respect to that fortifying moat, that included everything from expanding channels, products and services while reducing the amount of friction to conducting e-Commerce on its platform. See the full article.

 

U.S. Growth Basket

 

Steel Dynamics (STLD) – U.S. steel stocks rose on Thursday following news U.S. President Donald Trump will sign a directive asking for a speedy probe into whether imports of foreign-made steel are a U.S. national security risk.     Trump was expected to meet with leaders of U.S. steel companies and to sign the memorandum related to section 232 of the Trade Expansion Act of 1962 at a White House event this afternoon. Shares of Steel Dynamics, which reported results late Wednesday, were up 5%

 

Visa (V) – Visa reported adj. fiscal 2F (Mar) 17 EPS of $0.86 versus Credit Suisse and cons estimate of $0.79. Visa reported higher gross revenues (+$0.02), lower client incentives (+$0.03), and a lower tax rate. Management raised revenue and EPS guidance to the high end of previous ranges, and indicated that the tax rate should decline by 150 bps through 2017-18 as a result of the international reorganization. Additionally, growth strengthened in the first two weeks of April, though management noted that it was both a short period, and included Easter this year (though not 2016).

 

 

Retirement Corner

 

 

 

 

 

Reads of the Week

 

 

 

  • NBF Morning Comment for April 17, 2017 – World: Risk off for now Global equities posted their first back-to-back weekly decline since the U.S. election last week. The MSCI AC is still up 4% for the year but with four declines in six weeks the benchmark is back to February levels (chart). Geopolitical concern such as Korea, Syria, Turkey, Afghanistan, European elections and U.S. trade policy are weighing down on investor sentiment. See the full article.

 

 

 

 

 

 

 

 

 

 

 

Economic Reports

         

Monday April 24th – US Chicago Fed Index

Tuesday April 25th – US S&P Case-Shiller Home Price Index, US New Home Sales, US Consumer Confidence

Wednesday April 26th – Canada Retail Sales

Thursday April 27th – US Initial Jobless Claims, US Durable Goods Orders, US Pending Home Sales

Friday April 28th – Canada GDP; US GDP, US Consumer Sentiment

 

 

Earnings Reports

 

Monday April 24th – Alcoa, Barrick Gold, Prairie Sky Royalty, Precision Drilling, West Fraser Timber, CN Rail

Tuesday April 25th – 3M, AT&T, Baker Hughes, Caterpillar, Coca-Cola, Lockheed Martin, McDonald’s, Dupont, Teck Resources

Wednesday April 26th – Atrium Mortgage Corp, Boeing, BCE, Calfrac Well Services, Cenovus, iLookabout, NASDAQ Inc., Norfolk Southern, Proctor and Gamble, Sherritt Int’l, Twitter, Vantiv, Waste Management,

Thursday April 27th – American Airlines, Amazon, Bombardier, Constellation Software, Dow Chemical, Ford, GMP Capital, Alphabet, Intel, MEG Energy, MGM, Microsoft, Pinnacle Foods, Potash, Superior Plus, UPS

Friday April 28th – Cameco, General Motors, Aurora Spine, Exxon Mobil

 

 

Have a good weekend!

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